What are buy-sell agreements?
A buy-sell agreement is a legally binding document between business partners and governs how the ownership of the business will be handled if a co-owner dies or leaves the business. The agreement using a predetermined formula for how the share of business will be sold.
Life insurance is commonly used to fund a buy-sell agreement to ensure the availability of funds. Typically, each co-owner of the business will purchase a life insurance policy on the other partners. In the event that a co-owner leaves the business, the proceeds from the life insurance policy will be used to purchase a portion of the former co-owner's interest in the business.
Why does your business need to have a buy-sell agreement in place?
Whether you own all or any part of a business, you need to have a buy-sell agreement in place. Without one, you put your business partners and family in jeopardy of facing an abundance of financial and tax issues upon an event such as death, incapacitation, divorce, bankruptcy, sale, or retirement. We all know life never goes as planned, which is why it's critical to be prepared for the unexpected.
What types of businesses will benefit from a buy-sell agreement?
Buy-sell agreements benefit any type of business, including sole proprietorships, corporations, partnerships, and LLCs. The amount you need to fund a buy-sell agreement will vary depending on the business and factors such as the number of co-owners and individuals with a financial stake in the business.
What are the cost benefits to a buy-sell agreement?
While there is a cost associated with a buy-sell agreement, it's small in comparison to the tremendous value that the agreement will bring to your business. A buy-sell agreement will keep your business operating despite the loss of a co-owner, and it will also help to prevent fighting between family members, co-owners, and spouses. A buy-sell agreement that is funded by life insurance will help your business to avoid the liquidity problems that are commonly associated with the loss of a key member of the business.
There's no one-size fits all solution when it comes to buy-sell agreements, which is why you'll want to partner with an experienced firm that will advise you on the best way to structure your buy-sell agreement. Please contact us at Summerlin-Roberts to learn more about why your business needs to have a buy-sell agreement in place and the benefits of funding one with life insurance.